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Citation: 2004TCC414
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Date: 20040903
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Docket: 2001-2170(IT)G
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BETWEEN:
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DEBRA BROWNING,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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AMENDED REASONS FOR JUDGMENT
McArthur J.
[1] The Minister of National Revenue
assessed the Appellant in the amount of $254,438 on March 16,
2001 for failing to comply with "Requirements to Pay"
issued pursuant to subsection 224(1) of the Income Tax
Act, a garnishment section. The assessment reads:
A credit reassessment pertaining to the liability under
subsection 224(4) of the Income Tax Act in the amount of
$181,607.06 in respect of a previous assessment dated July 30,
1997 bearing #03711 for failure to comply with Requirements to
Pay dated November 3, 1993, January 7, 1994, March 31, 1994, June
21, 1994, September 23, 1994, January 4, 1995 and March 7, 1996
re: Berkeley Point Developments Inc. ...
Statement of Account
Original Assessment dated July 30,
1997
$364,755.86
Decrease
181,607.06
Revised
Amount
183,048.80
Plus interest to March 16,
2001
71,390.16
Amount unpaid and hereby
requested
$254,438.96
[2] During the relevant period, the
Appellant was the wife of Richard Browning. Richard owned
Berkeley Point Developments Inc. (Berkeley) and directed the
corporation to advance in 1988, 1989 and 1990, the amount of
$553,688 to the Appellant to purchase land and build their home.
Berkeley owed the Minister of National Revenue (the Minister) for
income tax for its 1989 and 1990 taxation years. The Minister
served the Appellant with several "Requirements to Pay"
which were not complied with. The underlying Berkeley assessment
was not seriously challenged by the Appellant. The only comment
was by Richard Browning who stated to the effect that he did not
entirely agree with it. This comes a little late. Berkeley
discontinued operating in the mid-1990s.
[3] The Appellant's position:
(i) The Minister has the burden
of proving its assessment of Berkeley (the underlying debt);
and
(ii) The Appellant did not have
a liability to pay Berkeley when the Requirements to Pay were
made by the Minister because she transferred corporate shares to
Berkeley essentially satisfying her indebtedness.
[4] The Appellant was a director
and/or shareholder of various corporations controlled by her
husband Richard. She was totally unaware of the facts and issues
having been a puppet of her husband with respect to the matters
before the Court. Her testimony was of no assistance. Richard and
Fred Masuch,[1] Berkeley's accountant during the period in
question, provided the background. Mr. Masuch was active in the
structuring of Richard's business activities from 1988 to
1995. From August 26, 1988 to April 30, 1990, Berkeley advanced
$553,688 to the Appellant under an unregistered mortgage prepared
by Mr. Masuch. The money was used towards the completion of
a principal place of residence for the Brownings.
[5] A Requirement to Pay of $249,658
was made to the Appellant by the Minister on November 3, 1993. It
was ignored. She submits, through her lawyer,[2] that she repaid $500,000 of her
mortgage debt to Berkeley by selling her shares in 316221 B.C.
Ltd. (316)[3] to
Richard who sold them to Berkeley on January 1, 1994 reducing the
mortgage debt by $500,000. An issue arises with respect to the
value of those shares and the timing of the transfer. The shares
of 316 derived that value because of its ownership of the shares
in Saybrook Holdings Ltd. (Saybrook).
[6] The relevant legislation in this
appeal is contained in subsections 224(1) and 224(4) which read
in part:
224(1) Where the Minister has knowledge or suspects that
a person is, or will be within one year, liable to make a payment
to another person who is liable to make a payment under this
Act (in this subsection and subsections (1.1) and (3)
referred to as the "tax debtor"), the Minister may in writing
require the person to pay forthwith, where the moneys are
immediately payable, and in any other case as and when the moneys
become payable, the moneys otherwise payable to the tax debtor in
whole or in part to the Receiver General on account of the tax
debtor's liability under this Act.[4]
224(4) Every person who fails to comply with a
requirement under subsection (1), ... is liable to pay to
Her Majesty an amount equal to the amount that the person was
required under subsection (1), ...
Subsection 224(1) empowers the Minister to collect unpaid
taxes by serving a garnishment letter on any person liable to
make a payment (in this instance the Appellant) to the tax debtor
(Berkeley). The garnishment letter to the Appellant requires her
to make amounts owing by her to Berkeley payable to the Receiver
General. The Appellant made no effort to pay. Berkeley is no
longer active.
[7] In this instance, the Minister
chose to proceed by way of assessing the Appellant rather than
attempting to recover the tax debt through the Federal Court or
any other Court of competent jurisdiction pursuant to section 222
of the Act. The Appellant's primary position is that
the Minister was required to prove that Berkeley was liable to
make a payment to the Minister, i.e. the underlying assessment. I
find there was no such requirement. The Appellant did not
challenge the underlying assessment although she had a right to
do so as found by the Federal Court of Appeal in Gaucher v.
The Queen.[5]
[8] With regard to the shift in onus,
the Appellant referred to The Queen v. Cyrus J. Moulton
Limited.[6]
Moulton differed from the present facts in that it was a
collection proceeding. The Minister was the Plaintiff and had the
burden of proof. In the present appeal, the Minister proceeded by
way of assessment. The Appellant appealed and had carriage of the
action and the burden of proof which was decided in Johnson v.
M.N.R.[7]
[9] The Appellant's second
position is that there is no clear provision in the mortgage for
the Appellant to pay anyone and the ambiguity in the mortgage
should be resolved in her favour. Counsel goes on to state that
if she did not make any payment, the liability would still remain
but for the fact that the 316 share transfer effectively reduced
the Appellant's liability to Berkeley by $500,000.
[10] Counsel for the Appellant submits that
there is no evidence of a debt between Berkeley and the Minister
and to be successful the Minister has the burden of proving that
Berkeley was liable to make a tax payment. I disagree. There is
reference to the Berkeley tax debt in assumption of fact 7(f) of
the Reply to the Notice of Appeal which reads:
f) as of
April 4, 1997, Berkeley was indebted to the Crown in the amount
of $482,607.59 for its 1989 and 1990 taxation years;
Clearly, the Appellant had the burden of disproving this
assumption.
[11] Richard acknowledged the debt during
his cross-examination stating something to the effect that he did
not entirely agree with the Berkeley assessment. I infer that he
did not cause Berkeley to challenge the original assessment when
it had the opportunity to do so. Further, the Appellant had the
opportunity to challenge Berkeley's assessment during the
hearing but failed to do so. The Appellant cannot sit back and
say to the Minister - prove the underlying debt or I do not have
to pay it particularly in this instance where her spouse
controlled Berkeley and arranged for Berkeley to lend her over
$550,000. The Appellant was a party to circuitous and confusing
financial manoeuvrings. Saybrook owned an interest in Red Robin
Restaurants. 316 owned the shares of Saybrook, the Appellant
owned the shares of 316, and sold those shares to Richard for
$500,000 who sold them to Berkeley who apparently forgave
$500,000 of the $553,000 mortgage debt owing to Berkeley by the
Appellant. The Appellant owed money to Berkeley and Berkeley owed
the money to the Minister. It is understandable that the Minister
was not prepared to remain silent.
[12] Paragraph 7(j) of the Reply does not
apply:
(j) the
corporate records of Saybrook Holdings Ltd. did not show that the
Appellant ever held shares nor was there any transfer of shares
worth $500,000 to Berkeley during any part of the fiscal period
between November 1, 1993 and October 31, 1994.
In paragraph 6 of the Reply to the Notice of Appeal reference
is made to five Requirements to Pay issued by the Minister and
there were two further demands referred to in the Notice of
Appeal dated November 3, 1993 and September 27, 1994 for a total
of seven Requirements to Pay issued to the Appellant by the
Minister. All of these requirements are referred to in the
assessment that is the subject of this appeal.
[13] The second submission by the
Appellant' counsel is that the Minister did not establish
that she had any liability to make a mortgage payment. Again, I
disagree. The Appellant owed Berkeley $553,688 plus interest as
evidenced by the mortgage document and by the fact that Berkeley
funds were advanced. She cannot take the position that she has no
liability because she knows nothing about it. She received the
Berkeley money, she signed the mortgage contract and her husband
was directing the entire transaction. She has to take
responsibility for her participation. She was part of her
husband's corporate arrangements. She is not an innocent or
unaffected third party. Further, the Appellant cannot rely on
ambiguous language in the mortgage to conclude that no payments
are required by her at all or for 25 or 30 years. The document
was prepared by her husband's accountant, for her benefit. It
is not to be compared to the common institutional mortgage
transactions which are prepared by the lender for the benefit of
the lender. To determine the Appellant's obligations, if any,
the contract, referred to as a mortgage[8] must be scrutinized. It reads in
part:
THIS Indenture made the twenty-sixth day of August, 1988
Between:
Debra Browning, businesswoman
of 3380 Craigend Road
West Vancouver, B.C.
(hereinafter called the Mortgagor)
AND
Berkeley Point Development Group Ltd., a
corporation with registered offices at
1750 - 1040 W. Georgia Street
Vancouver, B.C.
(hereinafter called the Mortgagee)
1. WITNESS
that in providing consideration of advances not to exceed
$560,000 Canadian dollars, the Mortgagor does grant and mortgage
to the Mortgagee all and singular, the following lands and
premises (hereinafter referred to as the "said lands")
situated in the New Westminster Assessment District in the
Province of British Columbia:
3380 Craigend Road
West Vancouver, B.C.
...
3. The amount
of principal money advanced on this mortgage is the sum paid to
the Mortgagor as aforesaid and the rate of interest chargeable
thereon is nine per centum (9.0%) per annum, calculated
half-yearly, not in advance, as well after as before maturity of
this mortgage, until paid.
It is agreed that payments are to be applied firstly to
interest calculated as aforesaid on the principal moneys from
time to time outstanding and the balance of the said monthly
instalments shall be applied on account of principal except
however in the case of default by the Mortgagor, the Mortgagee
may then apply any payments received during the period of default
in whatever order it may elect as between taxes, interest,
repairs, insurance premiums or other advances made on behalf of
the Mortgagor.
It is further agreed that for five years from August 26, 1988,
no payments will be made against the principal moneys. For the
twenty-five years following the aforesaid five year period,
payments will be made sufficient to extinguish the principal
moneys plus all interest calculated during the period.
4. THE
Mortgagor covenants with the Mortgagee that the Mortgagor will
pay the mortgage money and interest and observe the above
provisions.
5. AND the
Mortgagor covenants with the Mortgagee that the Mortgagor has a
good title in fee-simple to the said lands.
6. AND the
Mortgagor covenants with the Mortgagee that the Mortgagor has the
right to convey the said lands to the Mortgagee.
7. AND the
Mortgagor covenants with the Mortgagee that on default the
Mortgagee shall have possession of the said lands free from all
encumbrances.
8. AND the
Mortgagor covenants with the Mortgagee that the Mortgagor will
execute such further assurances of the said lands as may be
requisite.
...
10. AND at any time during
the period referred to in paragraph 3, the Mortgagor may pay all
outstanding principal moneys and interest due without penalty, at
which time the Mortgagee agrees to release any and all claims
against said lands.
[14] The document can and should be
interpreted to make sense as a whole. Certain sentences or
phrases that support the Appellant's present position cannot
be relied on to the exclusion of the remaining document. The
Appellant's accountant drafted the mortgage and the Appellant
and Richard relied on its terms when it was to their benefit,
namely to take $553,688 out of Berkeley tax free. It is the first
five-year period from August 26, 1988 to August 27, 1993
that is somewhat troublesome or ambiguous and requires the making
of inferences to give it a common sense meaning.
[15] Reading the document as a whole, I
find that there is a valid contract wherein the Appellant owes
Berkeley the principal sum of $553,688 being the total of
advances made to her. The question arises as to whether interest
accrued on the principal advanced from time to time from August
26, 1988 to August 27, 1993. The Respondent's counsel
concluded in her submissions[9] that it was not an issue but to give
meaning to the contract I feel obligated to deal with it.
[16] The interest rate of 9% per annum
is not contested. If the first five-year period was to be
interest free, the drafter, Mr. Masuch, who prepared the mortgage
for the benefit of the Appellant, should have and would have said
so.[10]
The parties did not have adverse interests. Berkeley was
controlled by Richard and the intent was to take $553,688 out of
Berkeley tax free to provide for a family home. No effort was
ever made over the years to pay back Berkeley other than the
transfer of the 316 shares. Before reference is made to monthly
instalments, the mortgage provides in the first paragraph of item
3 that the principal money advanced on this mortgage is the sum
paid to the mortgagor (the Appellant) and the rate of interest
chargeable thereon is 9% per annum, calculated half-yearly, not
in advance. Surely, this is to be interpreted as providing for
interest to accrue on the principal advances as they were made.
This is common sense and common practice. There is nothing
mysterious or creative about it. The reference to no payments in
the last paragraph of item 3 refers to no payments of the
principal money during the first five years. This supports the
conclusion that interest accrued on the principal advanced during
the first five years.
[17] The principal was fully advanced on
April 30, 1990 and interest continued to accrue and
accumulate at 9% calculated half-yearly and became payable on
August 27, 1993 when monthly payments of principal and interest
amortized over 25 years were to commence. When the first
Requirement to Pay was made on November 3, 1993, considerable
interest was due and payable by the Appellant to Berkeley. I have
no way of calculating how much, not knowing the dates progress
advances were made. In any event, this was not argued by the
Respondent and need not be pursued further. My findings with
respect to the first five years have no effect on the Appellant
and this decision.
[18] An interpretation with respect to
the period commencing August 27, 1993 is much easier. The final
paragraph of item 3 provides "For the twenty-five years
following the aforesaid five year period, payments will be made
sufficient to extinguish the principal moneys plus all interest
calculated during the period". This obviously provides for
principal and interest payments amortized over 25 years with
a term of 25 years. The previous paragraph of item 3 provides for
monthly payments. Item 10 corroborates the payment requirement by
granting the Appellant the privilege to repay "at any
time" all outstanding principal moneys and interest due
without penalty. I find that the mortgage provided for principal
and interest at the rate of 9%, calculated half-yearly, not in
advance, amortized over 25 years with a 25 year term payable
monthly. The first payment of principal and interest was due and
payable September 27, 1993 and payable each and every month
thereafter for 25 years when all of the principal and
interest will have been paid. An amortization schedule will have
to be obtained to reflect the amount of these monthly
payments.
[19] Should the parties be unable to agree
to a monthly calculation of the payment, it shall be determined
by a computer-calculated amortization schedule providing for
principal - $553,688, interest 9% calculated half-yearly, for
25 years commencing August 27, 1993 with the first of the
monthly payments due and payable September 27, 1993. On November
3, 1993, there was owing by the Appellant to Berkeley the monthly
payments that were due and payable for September 27, 1993 and
October 27, 1993. In addition the November 3, 1993 Requirement to
Pay was valid for 90 days and captured payments due
November 27, 1993 and December 27, 1993 and January 27,
1994. The January 27, 1994 payment would be considerably
less because of a $250,000 principal reduction of the
indebtedness dealt with below. The Appellant is liable to pay to
the Minister, all Berkeley monthly mortgage payments as required
in the Requirement to Pay of November 3, 1993 and the six
subsequent Requirements respecting the time limitations in
section 224 of the Act as amended in 1994.
[20] I will now move on to the question of
the transfer of the 316 shares. I believe the Respondent's
position is that, although the Appellant has not established that
the 316 shares had a $500,000 value, they were worth something
and that amount was subject to the Minister's garnishee of
November 3, 1993 which was in effect for 90 days including on
January 1, 1994 when the 316 shares were transferred from the
Appellant to Berkeley. This is somewhat nebulous.
[21] The Appellant's position is that
the subsection 224(1) Requirement to Pay does not attach to
property which includes shares. I accept the Appellant's
counsel's position that:
... a garnishee cannot attach to a transfer of property.
It can only attach to a payment of money, and I take that view
from the fact that although the word payment is used in the
opening words of ss. 224(1), the section goes on to say that
where those two conditions for payment have been met, the
Minister may in writing require the person to pay forthwith, and
then it says, "where the monies are immediately payable, and
in any other case as and when the monies become payable." He
can require the monies otherwise payable to the tax debtor in
whole or part be paid to the Receiver General.
(Transcript page 54 lines 14 to 25)
[22] I am left to deal with the value of the
316 shares as of January 1, 1994. The evidence with respect to
value submitted by the Appellant was vague and general in nature.
The shares probably had some value. The Appellant reported the
disposition in her 1994 income tax return indicating a taxable
gain of $374,000 and taking advantage of a $500,000 capital gain
exemption in effect at that time.
[23] The Appellant had the burden of proving
the value of $500,000 as of January 1, 1994. A PriceWaterhouse
appraisal was presented for Red Robin's Restaurants as of
July 25, 1993. This was of little assistance. The connection to
the share value of 316 as of January 1, 1994 was not specific.
Mr. Masuch stated that they were worth at least $500,000 yet he
advanced no evidence as to their market value but for reference
to Saybrook's financial statement, particularly the retained
earnings of $258,446 in 1992. Again, this lacked specificity and
is of little assistance. Saybrook last filed corporate returns in
1992 and was struck from corporate records in 1994.
[24] To rely on a value of $500,000, the
Appellant has to provide at the least an evaluation by an expert
professional appraiser of shares with details establishing the
value. This, of course, would permit the Minister to properly
evaluate the Appellant's position and make an educated
decision. This was not possible with the generally vague
references to value advanced by the Appellant. The Appellant
through her advisors, tried to carry out aggressive tax planning
to achieve tax savings and possibly other benefits. In doing so,
careful attention to correct formal steps is important: "In
tax law, form matters".[11]
[25] The documentary evidence produced does
not support the $500,000 value. The burden of proof on a balance
of probabilities has only been partially discharged. The degree
of probability required to discharge the burden of proof in a
civil case was described by Lord Denning in Miller v. Minister
of Pensions[12] as follows:
... That degree is well settled. It must carry a
reasonable degree of probability, but not so high as is required
in a criminal case. If the evidence is such that the tribunal can
say: "We think it more probable than not", the burden
is discharged, but, if the probabilities are equal, it is
not.
That degree has not been achieved yet, even the Respondent
admits that the shares had some value on January 1, 1994. I have
difficulty completely ignoring this fact. While it is a somewhat
rough and ready solution, I place a value of $250,000 on the
shares to be credited to the Appellant as a partial paydown of
the mortgage principal made by the Appellant on January 1, 1994.
There is sufficient evidence from a combination of the evidence
of Richard and Mr. Masuch, the Saybrook financial statement and
the Red Robin Restaurants' evaluation to conclude that
$250,000 is a reasonable estimate of value. In arriving at this
decision, I am guided by the reasoning of Walsh J. in Bibby
Estate v. The Queen[13] where he stated:
While it has frequently been held that a Court should not, after
considering all the expert and other evidence merely adopt a
figure somewhere between the figure sought by the contending
parties, it has also been held that the Court may, when it does
not find the evidence of any expert completely satisfying or
conclusive, nor any comparable especially apt, form its own
opinion of valuation, provided this is always based on the
careful consideration of all the conflicting evidence. The figure
so arrived at need not be that suggested by any expert or
contended for by the parties.
Conclusion
[26] The Appellant failed to comply with the
requirement under subsection 224(1) and under subsection
224(4), is liable to pay the Minister as follows based on a
principal payment of $250,000 on January 1, 1994: monthly
payments due under the $553,688 Berkeley mortgage for September
27, 1993, October 27, 1993, November 27, 1993 and December 27,
1993; the monthly payments due on the reduced principal of
approximately $303,000 due on the 27th of each and every month as
required by the Requirement to Pay commencing January 27, 1994.
Having been advised by counsel for the Appellant at the outset
of the hearing that the Respondent's claim for interest was
abandoned, and counsel for the Respondent having conceded the
interest issue, I make no order with respect to interest as
claimed in paragraph 13 of the Reply to the Notice of Appeal.
In view of the divided success, no costs are awarded.
Signed at Ottawa, Canada, this 3rd day of September,
2004.
McArthur J.
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